Dividend investing allows investors to focus on fundamentals rather than becoming distracted by the stock market’s constantly changing mood. This premise has been repeated decade after decade by some of the greatest market scholars who ever lived.

This perspective lies at the heart of what we do at Washington Crossing Advisors (WCA). The WCA Rising Dividend portfolio strategy centers on dividend increases from solid, high-quality companies at reasonable prices. Consistent dividend payments from fundamentally strong companies (low debt, profitable assets, consistent business) allow us to look through short-term market noise and stay focused on the long-term prospects of a business.

Compared with growth investing, which seeks capital appreciation from rapidly expanding businesses, dividend investing emphasizes stability and tangible income that can cushion investors during market downturns. Even though total returns are about more than just dividends, investors with a long-term income focus should continue to seek “quality and income at reasonable prices.” Quality dividend stocks have been largely overlooked in the recent market runup, while the chase for AI-led growth has driven the S&P 500 dividend yield to its lowest level since the late 1990s.

Creating Value is Not Just About Dividends

It’s true that returns come from more than just dividends. If we understand dividends as “payment to the owner,” this makes perfect sense.

Imagine that we owned a pizza shop. To grow the shop’s value, we might try to enhance the menu, improve delivery, renovate, or advertise. Early on, we’d probably reinvest back into the business instead of paying ourselves a big dividend. Over time, those investments would (hopefully) increase profits and make our business worth more. In this way, value is created by investing in the business, not by taking money out of it.

Dividends, therefore, don’t create value by themselves. They matter because they signal strength. Mature companies with reliable cash flows can afford to share profits with shareholders, while younger firms often need to reinvest every dollar. Dividend growers tend to be mature, financially stable companies with consistent cash flow and lower volatility. For investors seeking steady income and growth, these are the companies that belong at the top of the list — those that combine tangible cash income with disciplined, long-term growth¹ .

Quality at Reasonable Prices

Even though returns are not just about dividends, “quality and income at reasonable prices” helps us focus on what ultimately matters most in the long run.

Consider the chart below. The S&P 500 dividend yield has now fallen to levels last seen in the late 1990s and is at the lowest level seen in over a century (Chart A). The decline in yield mirrors a surge in valuations for the largest U.S. stocks. In recent months, growth expectations have soared while risk premiums have collapsed. With the total value of public equities exceeding $70 trillion — up more than $30 trillion since early 2023 — the S&P 500’s yield has fallen to 1.2% from 1.8%. And while a secular trend of declining yields has not meant the stock market could not advance, today’s S&P 500 concentration and valuation extremes make today’s setup less forgiving should the economy slow or risk appetite ebb. This combination of high valuations and compressed yields suggest that markets have already priced in much of the optimism surrounding future growth and may not be receiving adequate compensation for risk.

More simply, the decline in yield means a $100,000 investment now only generates $1,200 in annual cash income, down by a third from $1,800 that the same investment would have generated just two years ago. If we are looking for income from an equity portfolio, today’s market yield is not an attractive proposition in nominal terms and even worse after inflation.

Chart A

Where to Find Quality and Yield

The good news is that opportunities for “quality and income at reasonable prices” still exist — if you’re willing to look.

Such stocks tend to offer moderate yields and steady dividend growth rather than high, unsustainable payouts. Today, many of these quality companies provide far better starting yields than the S&P 500. For example, the difference in dividend yield spread between the WCA Rising Dividend portfolio and that of the S&P 500 is now the widest on record (Chart B). The portfolio focuses on dividend growers with low debt, profitable assets, and consistent business models. These companies may not be flashy, but they offer far better value than the S&P 500 or highest-growth names now dominating headlines.

Chart B

Last week, we noted that lower-quality companies — those with more debt, weaker profitability, and inconsistent results — have outperformed higher-quality firms since early 2023 (See “Quality Under Pressure, Patience Required”). This “low-quality cycle” has lasted longer than normal and, in our view, appears set to reverse in the months ahead. Meanwhile, five mega-cap and AI-themed companies now dominate the market narrative, each priced with embedded growth expectations exceeding 10% in perpetuity. While these companies are indeed highly profitable and innovative, their current valuations imply near-permanent dominance with growth that forever exceeds the potential growth rate of the economy — assumptions that are not likely to be validated over the long-run. And should these expectations adjust to a more likely reality, volatility for these stocks — and for the market as a whole — could rise sharply. In that environment, the defensive characteristics of high-quality dividend growers may offer a welcome pocket of calm.

As history has shown through multiple market cycles, it’s often the companies that endure stress well that separate long-term success from failure. (See our recent commentary titled “Why Market Stress Favors Quality: The Macroeconomic Case for Quality Investing” for more on defensive characteristics).

Conclusion

Dividend growth investing combines the benefits of tangible income with consistent, compounding growth from dependable companies, making it an effective counterweight to speculative concentration. The objective is to build a rising stream of income from high-quality businesses purchased at reasonable prices — not chasing yield from financially weak firms or paying excessive prices for growth or the next big story.

Although total returns are not solely about dividends, investors should continue to seek quality and income at reasonable prices for two key reasons:

1. High-quality dividend stocks have been overlooked, creating an attractive entry point.
2. The pursuit of hyper-growth has driven the S&P 500’s dividend yield to record lows, setting the stage for heightened market risk.

In other words, while markets may celebrate the exciting and the new, enduring wealth is most often built through patience, discipline, and a steady flow of dividends from quality companies. When sentiment eventually shifts — as history suggests it inevitably will — those quality fundamentals will matter most.

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Footnote:

¹ We do not include share buybacks in this analysis, but others might include buybacks as a component of total return or shareholder yield. Buybacks are not appropriate in this context for two main reasons. First, they do not represent an actual cash payment to an owner, nor do they represent investment for growth back into the business. Second, buybacks provide less of a signal of financial health because they are exercised on a discretionary basis. Buybacks are not declared in the same way that dividends are and are often increased, foregone, or eliminated with little fanfare or notice. We have not found buybacks to be as consequential as regular dividends from the perspective of identifying quality fundamentals. In recent years, buybacks have been substantial with quarterly buybacks for S&P 500 companies ranging from about $200-250 billion according to research by Yardeni & Associates.

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S&P 500 — The Standard & Poor’s 500 Index is a capitalization-weighted index that is generally considered representative of the U.S. large capitalization market.

Indices are unmanaged, and it is not possible to invest directly in an index. All benchmark returns presented are provided to represent the investment environment existing during the time periods shown. Actual investment performance will vary due to fees and expenses. For comparison purposes, the benchmarks include the reinvestment of income. The benchmarks are unmanaged and unavailable for direct investment.

The S&P 500 High Beta Index measures the performance of 100 constituents in the S&P 500 that are most sensitive to changes in the market. Constituents are weighted relative to their level of market sensitivity, with each stock assigned a weight proportional to its beta.

The S&P 500 Low Volatility Index measures performance of the 100 least volatile stocks in the S&P 500. The index benchmarks low volatility or low variance strategies for the U.S. stock market. Constituents are weighted relative to the inverse of their corresponding volatility, with the least volatile stocks receiving the highest weights.